J&J Snack Foods Corp. — Q2 FY2018 Form 10-Q
Business context and period. The filing covers the quarter and six months ended March 31, 2018; comparable periods ended March 25, 2017. J&J Snack Foods sells products through Food Service, Retail Supermarkets and Frozen Beverages, including soft pretzels, bakery products, frozen novelties and ICEE-branded beverages. Results are seasonal: frozen beverage and frozen juice sales generally rise in the third and fourth quarters.
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $266.1 million, up 8% | $531.3 million, up 13% |
| Gross profit / margin | $77.3 million / 29.04% (29.54% prior year) | $150.6 million / 28.34% (29.38% prior year) |
| Operating income | $23.5 million, down 2% | $44.8 million, up 3% |
| Net earnings | $17.8 million, up 12% | $54.1 million, versus $29.5 million |
| Diluted EPS | $0.95, versus $0.85 | $2.88, versus $1.57 |
| Operating cash flow | Not reported separately | $41.9 million, versus $40.8 million |
| Capital expenditures | Not reported separately | $26.3 million, versus $33.0 million |
Six-month net earnings included a $20.9 million deferred-tax remeasurement benefit and a $3.9 million tax reduction primarily associated with the Tax Cuts and Jobs Act, partly offset by a $1.2 million one-time repatriation-tax provision. The company reported these tax estimates as provisional. Excluding the deferred-tax gain and repatriation tax, effective tax rates were 28.6% for the six months and 28.7% for the quarter.
At March 31, cash and cash equivalents were $75.2 million; current held-to-maturity securities were $50.6 million. Current assets were $374.6 million and current liabilities $115.0 million. Total assets were $887.5 million and stockholders’ equity $722.2 million. There were no borrowings under the $50 million revolving credit facility; capital lease obligations totaled approximately $1.3 million. Management said cash, investments, operating cash flows and borrowing capacity were sufficient to fund growth and expansion.
Changes, drivers and management commentary
- Sales growth reflected both acquired businesses and organic gains. Excluding first-year sales from Hill & Valley, an ICEE distributor and Labriola Bakery, sales rose 6% in the quarter and 7% for the six months.
- Food Service sales increased 9% for the quarter and 15% year to date, while segment operating income declined to $18.5 million and $34.4 million, respectively. Higher distribution costs, payroll and insurance, product mix, facility-level volume and ingredient costs weighed on results. A recall of MARY B’s biscuits reduced quarterly operating income by approximately $0.5 million.
- Retail Supermarkets sales increased 10% for the quarter and 8% year to date. Six-month operating income improved to $5.1 million, helped by lower coupon and media spending. Handheld product sales continued to decline.
- Frozen Beverages sales rose 3% for the quarter and 7% year to date; segment operating income increased to $2.5 million and $5.2 million. Beverage and service revenue grew, while machine sales fell 33% in the quarter and 22% year to date.
- Gross margin pressure reflected higher labor and insurance costs, Labriola production inefficiencies, facility shutdown costs, product mix, lower volume at certain facilities and higher ingredient costs. Management said the Labriola inefficiencies and Chambersburg shutdown costs were behind the company and had little second-quarter impact.
- Distribution expense increased, particularly from higher fuel costs and implementation of the electronic logging device mandate; management expected elevated distribution costs through at least the rest of FY2018.
- Six-month operating cash flow exceeded capital spending by approximately $15.6 million. Cash decreased $15.8 million over the six months, primarily alongside investing and financing outflows. Cash dividends paid were $16.2 million.
Outlook, risks and contingencies
Management estimated an effective tax rate of 28%–29% for the final two quarters of FY2018 and 26%–27% for FY2019. No specific sales or earnings guidance was provided. The company cited raw-material and labor costs, insurance, customer consolidation, sales conditions, execution of manufacturing and distribution, acquisition integration, tax-law changes and interest rates as factors that could affect results. Adoption of the new lease standard, expected in FY2020, is anticipated to materially increase reported assets and liabilities. Revenue-standard adoption was planned for FY2019, with no material impact anticipated.
Key facts for investors to verify
- Assess underlying earnings apart from the significant, provisional tax benefits and the one-time repatriation tax.
- Track whether gross-margin pressure and higher distribution costs persist, and whether management’s stated operational improvements hold.
- Review acquisition-related contributions and the performance of Food Service, the largest segment, alongside continued weakness in retail handhelds and machine sales.
- Monitor working-capital needs, investment-security maturities and liquidity; held-to-maturity securities had $1.5 million of unrealized losses at March 31, 2018.
- Reconcile a filing-text inconsistency: the financial statements report six-month net sales of $531.311 million, while the MD&A states $531.111 million.